Bank deposits guaranteed for 3 years

12 October 2008 — 3:35pm

Update Australia will guarantee all bank deposits for three years and guarantee wholesale funding to Australian banks in an attempt to combat the global credit crisis, Australian Prime Minister Kevin Rudd said.

Australian will also double the funds available for mortgage-backed securities to $8 billion to help maintain liquidity for non-bank lenders, Mr Rudd told reporters today, adding the measures were part of an international response to the crisis.

He said the Australian government was in close contact with other countries, including the G-20, and coordinated action was crucial. A government spokesman later said the Australian move was being coordinated with New Zealand, comments later confirmed by New Zealand media.

''The measures I have announced today are part of also international measures designed to unclog the arteries of the global financial system,'' Rudd told reporters.

''The government is reassuring Australians that their credit union, building society or bank is a safe haven for their savings,'' Louise Petschler, chief executive of Abacus - Australian Mutual, an industry group, said in a statement, according to Bloomberg News.

Opposition Leader Malcolm Turnbull welcolmed the move to guarantee all deposits in Australia, regardless of size.

''It's a very important step and we will undertake to give the government every assistance in insuring that the necessary legislation will pass through the parliament promptly,'' Mr Turnbull told reporters. Week from hell

The move to guarantee deposits follows a week of investor panic, with resulted in massive falls on share markets.

On Friday, Australian equities had their worst day since the 1987 Crash, losing more than 8% of their value.

The Spi200 share futures are pointing to a flat opening, with a gain of 27 points indicated. That confidence may be consolidated - or wiped out - depending on the results of weekend talks among Group of 20 finance chiefs in Washington and separate meetings among European leaders later tonight.

''Whether it will help the local market is doubtful because our market is hostage to whatever is going on internationally,'' Mr Oliver said. ''There isn't an issue with Australian banks anyway, but it is a positive thing and does provide additional comfort to depositors of Australian banks.''

The Australian dollar also sank last week, recording its worst five-day slide since its float in 1983. It starts the week at 64.8 yen and 64.32 US cents. Well capitalised

Mr Rudd said while Australian banks were well capitalised and well regulated, the measures were needed to help Australian banks compete with others in the international market.

''I don't want a first-class Australian bank discriminated against because some other foreign bank, which has a bad balance sheet, is being propped up by a guarantee by a foreign government,'' Mr Rudd said.

Under the plan, all deposits in Australian banks, building societies and credit unions, would be guaranteed by the Australian government for the next three years. Deposits in Australia tally between $600 billion and $700 billion, he said.

In return for the guarantees, banks would have to pay an insurance premium, Mr Rudd said.

''That will be levied at an appropriate rate determined between treasury and themselves, which will go to ensure that this is not simply a free gift from the government by way of a guarantee to the banks.''

The government would also guarantee term wholesale funding to local banks until global financial markets stabilised. This means anyone lending money to an Australian bank has an assurance their money is safe.

The government's Office of Financial Management will also purchase an additional $4 billion in residential mortgage backed securities to ensure the local Australian mortgage market has access to sufficient funds for future operations. That adds to the $4 billion already earmarked for such purchases.

''The measures I have announced today are based on the advice of Australia's economic regulators,'' he said. ''We are in the economic equivalent of a national security crisis, and the challenges are great.''

Mr Rudd said Australian banks would be on the same footing as other international banks.

Spending under review

Earlier, Foreign Minister Stephen Smith said the government's budget committee would meet to review action needed in light of the worldwide crisis that is spreading from financial markets to the rest of the economy.

His comments were echoed by Treasurer Wayne Swan: ''In a situation like this we will put everything on the table because our bottom line is responsible economic management,'' Treasurer Wayne Swan told ABC television.

''But all of our promises were affordable and I believe that we have implemented them in line with our election commitments. But any prudent government will look at our current situation, assess what we do next given the global shock then announce those decisions in good time,'' Mr Swan said.

Some commentators expected the Australian government would raise the proposed deposit insurance scheme from $20,000 to $100,000, as called for by Opposition Leader Mr Turnbull.

He repeated calls for the government to delay the introduction of its planned emissions trading scheme (ETS) in 2010, which will force companies to pay for greenhouse gas pollution that is blamed for causing dangerous climate change.

''This ETS, the rushed introduction of it, is causing considerable uncertainty right through the Australian community and particularly with business,'' he said, adding that the government should wait to see the global response first.

Asked today about the 2010 timetable, Mr Rudd told reporters: ''Our ambition remains as I described it before'' .